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The Daily Reckoning Weekend Edition Saturday, July 3, 2010 Taipei, Taiwan ------------------------------------------------------- After two decades in the wilderness, are Japanese equities finally a buy? A closer look at how to play the world's worst performing market, Plus, all the past week's reckonings for your lazy, long weekend enjoyment... ------------------------------------------------------- Markets Crashed Again This Week...ending Down over 10% for the Quarter... Is THIS the beginning of the next leg down? And, more importantly, what can you do to avoid the fallout? Joel Bowman, reporting from Taipei, Taiwan... If all has gone according to plan, by the time you read this, your editor will be homeless and on a flight to Hong Kong. If there's been a hitch, he'll still likely be homeless...but stranded at the Taipei airport or, worse, cooped up in a tiny room of some government office here in Taiwan. But let's not think negative thoughts... After a solid stint here in Asia, between the Far and Middle East, we're finally moving on to a new land. We're not sure exactly where that land is just yet. But it will be new...at least to us. Hong Kong, located within a nine iron's distance from this verdant little island, will be our first port of call. From there, we'll head north into China, then east to Vancouver, Canada. After that...well, we've still got a month to think about that. Probably, we'll head south. But we'll keep you posted... In the meantime, we've got a special guest essay for you this weekend from our friends over at The Oxford Club. Fellow reckoners will recognize this much-hated asset class as one half of Bill's Trade of the New Decade. Alex Green, Chief Investment Strategist with the Oxford Club, digs a little deeper into the growing appeal of Japanese equities. Please enjoy... ------------------------------------------------------- How to Play "The Land of Rising Stocks" Alexander Green Charlottesville, Virginia The Wall Street Journal reported last week that, for the first time in three years, foreign investors are increasing their holdings in the Japanese stock market. Data released by the Tokyo Stock Exchange shows that foreign ownership of Japanese shares rose to 26% for the year that ended in March, up from 23.5% a year earlier. The Journal suggests that a recovery in Japanese corporate earnings is tempting foreign investors back to the country's equity markets. But I think there's more going on here. Perhaps hedge fund managers and other savvy global investors have paged back through their old, dog- eared copies of Dr. Jeremy Siegel's Stocks for the Long Run. If so, they may have recognized something significant... Crunching the Numbers on Japan Siegel notes that it's rare for stocks to go 10 years without giving a positive return. Yet we've experienced just such a rarity over the last decade. For stocks to go 20 years without giving a positive return is almost unheard of. And 30 years? That's rarer than Big Foot, Nessie and the Abominable Snowman combined. Which brings me back to Japan... In 1989, the Nikkei 225 - Japan's equivalent of the S&P 500 - hit a new all-time high near 40,000. Today, more than 20 years later, it languishes near 10,000 - almost 75% lower. In other words, the Nikkei 225 would have to rise 300% just to get back where it was in 1989. And it wouldn't surprise me if it did just that by the end of the decade. After all, it's happened before. In the 1970s, the US market returned just 0.34% a year - a 3.4% total return for the decade. Yet the Japanese market compounded at 16%, generating a 10-year return of 344%. What other asset class offers that kind of potential return over the next decade? (Gold bugs, keep your seats.) Don't Chase the Bullet Train... Get on Board Now The groundwork has been laid. Last August, after more than 50 years, Japan's opposition party trounced the Liberal Democratic Party in a landslide election. The new government has promised to shrink the country's massive bureaucracy and cut wasteful public spending. It also intends to end more than 20 years of economic stagnation by cutting taxes and focusing on small and mid-sized businesses. Of course, we're all skeptical of politicians' promises, but there is evidence that they mean business this time. Twenty years is a long time to leave your economy in a funk. It's resulted in Japanese stocks being among the cheapest and most unloved in the world. Virtually no one is enthusiastic about the Tokyo market. However, great opportunities are born when dirt-cheap valuations marry investor apathy. Plus, Japanese investors are flush with cash. They've largely ignored domestic stocks after two decades of sub-par returns. And as that money begins to find its way out of mattresses and back into Japanese equities, the Tokyo market should lift off. This is doubly true when institutional money managers return to Japan in a serious way. For years, global fund managers have outperformed the world benchmark by simply underweighting Japan. But let the Shinkansen take off without them and they will be forced to dash after it. So how do you play this? Two Ways to Ride the Japanese Stock Market There are dozens of worthwhile Japanese ADRs trading on Nasdaq and the Big Board. But you can gain exposure to Japanese stocks through two ETFs... - iShares MSCI Japan Index (NYSE:EWJ), which invests in large-cap Japanese stocks. - Wisdom Tree Japan Small-Cap Dividend Fund (NYSE:DFJ), which captures the best of the Japanese small-cap sector. Or you can spread your bets and own both. Incidentally, if you remain skeptical about Japanese stocks digging their way out of this 21-year hole, consider again how unlikely it is that Japanese stocks will earn a negative 30-year return. As Dr. Siegel writes in Stocks For the Long Run: In the 12 years from 1948 to 1960, German stocks rose by over 30% per year in real terms. Indeed, from 1939, when the Germans began the war in Poland, through 1960, the real return on German stocks matched those in the United States and exceeded those in the U.K. Despite the total devastation that the war visited on Germany, the long-run investor made out as well in defeated Germany as in victorious Britain or the United States. The data powerfully attest to the resilience of stocks in the face of seemingly destructive political, social, and economic change. The story in Japan was similar. By the end of 1945, stock prices stood at approximately one-third of their level just prior to the Empire's surrender. Over the next 40 years, the Japanese market returned more than 20 times its American counterpart. If 200 years of world stock market history is any guide, the current decade should be another barnburner for Japan. Good investing, Alexander Green, for The Daily Reckoning Editor's Note: Whether you're in the stock market for long-term investing, or short-term trading, The Oxford Club has several different approaches and portfolios to suit your style. Led by Alexander Green, see exactly how his recommendations led the independent Hulbert Financial Digest to rank The Oxford Club's Communiqué among the top five newsletters in the United States over the past 10 years. ALSO THIS WEEK in The Daily Reckoning... How to Invest in What China Really Needs By Chris Mayer Gaithersburg, Maryland There must be more communists in Berkeley than in Beijing. That thought crossed my mind as we swept through Beijing's wide streets, crowded with cars and lined with tall modern buildings. A more bustling capitalistic city would be hard to imagine. What Powers Your Google? By Marin Katusa Vancouver, British Columbia What do search engines and wind energy have in common? That's the question a lot of investors were asking earlier this month, when Google made an almost US$40 million investment into NextEra Energy Resources, a North Dakota wind energy firm. The simple answer: more than you think. Socialist Pigs By Joel Bowman Taipei, Taiwan Capitalism produces. Socialism distributes. The two systems do not coexist comfortably with one another. In fact, they are inimical. Some of the most celebrated champions of socialism have coined terms like "greedy capitalist" or "capitalist pig." By implication, a socialist is neither greedy nor a pig. But economic history suggests that socialists are just as porcine as their capitalist counterparts...maybe even more so. The End of the Nominal Recovery By Eric Janszen Bedford, Massachusetts Monetary and fiscal stimulus can halt a deflation spiral, but central banks and governments can't print purchasing power. In other words, one year after the official end of the recession, the economy shows no signs of booming. Emergency Keynesian policy measures taken to keep the debt crisis from devolving into a 1930s deflationary spiral show signs of losing effectiveness, and the self reinforcing economic growth story is giving way to talk of a "double dip" recession, as trouble in Europe is expected to slow the US economy by the end of the year. Confidence in the resilience of the recovery is waning. Who Pays Bad Debts? By Bill Bonner London, England A front page photo in Tuesday's Financial Times shows lightning striking near the Parthenon. Zeus must be reading the paper. Greece is supposed to cut its public spending by an amount equal to 10% of its GDP. Even so, its public debt is expected to rise to nearly 150% of GDP by 2016 - or three times the level of Argentina when it defaulted in 2001. The Weekly Endnote: A few things strike us as we bid our final goodbyes to friends here in Taipei. What will become of this little island, for instance, and its smiling, hardworking people? Formosa (from Portuguese: Ilha Formosa, "Beautiful Island") spent the better part of the last century more or less as a political pawn. It sat in the crossfire, literally, between China, Japan and it's own struggle for sovereignty during and after Mao's communist part rose to power on the Mainland. More recently, it has been a kind of hot-button bargaining chip on the world economic and geopolitical stage as China and the US duke it out for future global supremacy. Will the island ever be officially recognized as its own sovereign state? Not in our lifetime, we'd bet. For better or worse, Taiwan's fortunes seem inextricably linked with those of Mainland China. As one senior general of China's People's Liberation Army warned his American counterparts a few years ago, "Ultimately, you care more about Los Angeles than Taipei." Our thought is that he's probably right. Enjoy your long weekend... Cheers, Joel Bowman Managing Editor The Daily Reckoning ------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com   The Daily Reckoning - Special Reports: Gold: The Truth About Gold Fiat Currency: Using the Past to See into the Future "THE GREAT AMERICAN RECOVERY RP-OFF" Brace yourself for what's about to go down as the BIGGEST FINANCIAL SWINDLE in world history.